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Diving Dow Doesn’t Denote Disaster

The diving Dow is certainly bad news for some, but could be good news for America and our famous debt and deficit. Certainly those people who either have to sell in order to generate cash or the amateurs who are always the last in at the top and first out in panic are getting hurt very badly. For those who don’t have sell, this is a non-event.

Let me explain: As with stocks, if I buy a house for 100k and after a decade it gets assessed at 1.5 million, if I don’t sell, I haven’t made 1.4 million. Nor if the assessed value then goes down to 1 million, have I lost half a million. This is the Tao of the Dow.

But of course, it isn’t just the desperate and amateurs who are selling. So why is so much money seemingly fleeing, but actually just leaving, the market? Why are mutual funds and institutional investors taking some of the money they control out, and where is it going?

There are two answers, and they are related. One reason is the real crisis in the Euro Zone. The global economy is very fragile and the second bailout of Greece is unlikely to work. Worse still, both Italy and Spain are teetering. It is not at all clear that the healthier countries, e.g. Germany, will be either willing or actually able to save them and hence save the Euro. European and American investors understand that when Europe gets sick–and Japan is already very sick–the rest of the world, including us, is vulnerable to the contagion.

The second reason for selling out of the market is a good sign. The money coming out of the market is not being hidden in mattresses all over the world. Nor are all the American businesses that are sitting on trillions of dollars in cash, sitting on actual cash. Much of the money coming out of the market and being squirreled away by corporations is being kept in American Treasury Bonds.

Yes, our deficit ceiling controversy was about our commitment to pay the interest on the bonds we sold. We are triple A because we pay and can be counted on to pay. When that commitment came under question it created a disincentive to buying more bonds–traditionally the safest place to park money.

We are so secure an investment that we pay about 0 % on bonds from 3 months to a year! Two year to thirty year paper goes from 1/3rd of 1% all the way 4.3%. Why not buy a Greek bond? It promises over 15% annual yield. The question answers itself. Risk! We are still a good, if low-yielding, risk.

This is why China buys American. I know most of the media says that China is our biggest holder of debt. It’s not really true. They are the largest national holder/buyer of our treasury bonds. The majority of our bonds belong to American citizens–I’m still holding some of the Series E Bonds I got for my Bar Mitzvah! Most of our bonds are held by corporations and investment funds.

Now that our bonds are looking secure again, and with the global economy looking shaky, money is migrating to our bonds. We are still a safe place to park money. The volatility of the Dow is a function of fear. The money being lost is from the individuals who sell. It is not being lost from the economy, but only moved into our treasuries. The buying of our debt, in the form of bonds, is good news for America.